Shares of Teladoc Health (TDOC -2.91%) shot up last week after the company reported third-quarter results that were better than expected. The company still isn't able to report significant profits, but losses in the third quarter were a lot less than investors have begun to expect from this provider of telehealth services.
Last week, Teladoc Health stock climbed a surprising 24%, and investors want to know if they can expect more gains from here on out. To see if this company has what it needs to provide big gains for its shareholders, let's look at the reason it soared recently.
Why Teladoc Health stock jumped recently
Shares of Teladoc Health recently had one of their best days in a long time because the company reported a much smaller loss in the third quarter than investors have gotten used to. Writing down the 2020 acquisition of Livongo led to a reported loss of $9.8 billion during the first half of 2022.
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Instead of another huge loss in the third quarter, the company lost just $73.5 million. While investors would have preferred a profit, the modest loss of $0.45 per share was significantly less than the $0.55 per share that Wall Street had predicted.
Reasons to buy Teladoc Health now
In addition to a bottom line that is approaching positive territory, there are other signs that Teladoc Health can deliver gains to patient investors. In the third quarter, total revenue rose 19% year over year as the number of paid members reached 57.8 million.
In theory, the value of Teladoc Health's platform increases as more patients and physicians become familiar with it. The company is winning the race to develop a network effect. It facilitated over 4.7 million visits in the third quarter, which was a 14% gain over the previous-year period.
Reasons to remain cautious
Any technology-based company with over 50 million paid members that still can't make ends meet should be viewed with some suspicion. I'm not a buyer of this stock because I don't think Teladoc's business has any pricing power.
If Teladoc Health's overall size were helping it demand higher prices than its smaller competitors, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) would be rising as a percentage of revenue. Instead, adjusted EBITDA fell to 8.4% of total revenue in the third quarter from 13.9% at the end of 2021.
Moreover, Teladoc Health probably won't be the largest provider of telehealth services for very long, if it hasn't been knocked out of this position already. Venture-backed Doctor On Demand isn't a publicly traded company subject to the same disclosures as Teladoc, but we know that it boasts 98 million covered lives at the moment.
Teladoc's biggest competitors in the years ahead will most likely be healthcare benefits managers that are delving deeper into primary care. Providing healthcare benefits is an increasingly lucrative option for a small handful of giant companies that also collect health insurance premiums. Rather than hiring Teladoc to facilitate virtual doctor visits, Cigna acquired MDLive last year.
Earlier this year, CVS Health splashed out with a proposed $8 billion acquisition of Signify Health. This is a network of 10,000 clinicians that will connect with 2.5 million unique members this year through a combination of in-person and virtual visits.
It doesn't look good
Facilitating virtual healthcare is such a commoditized service that even pandemic-fueled lockdowns couldn't pull Teladoc Health's bottom line out of the red. Now that gigantic healthcare benefits managers are intensely focused on primary care benefits, realizing a profit in this competitive space will only become more challenging. Without a clear path to profitability, it's probably best to watch Teladoc Health from a safe distance.
